Are Investment Banks Similar to Commercial Banks? Learn 5 Major Differences

Investment banks are not like your regular commercial banks, where you book fixed deposits, transfer money, or withdraw cash. These are specialised financial institutions that help companies and individuals raise money. They provide a range of services, like underwriting new stock issues and advising on mergers and acquisitions. Investment banks also engage in “proprietary trading”, where they invest their own funds to generate profits.

Most importantly, they play a critical role during an initial public offering (IPO). They create detailed prospectuses and perform industry and competitor analyses to ensure companies attract investors. In this article, let’s understand the meaning of investment banks in detail and see how they differ from commercial banks.

• Commercial banks offer standard banking services like accepting deposits and advancing loans.
• Investment banks perform complex financial activities like underwriting, asset management, and mergers.
• Commercial banks serve millions of individuals and businesses, whereas investment banks serve an exclusive group of corporations.
• Investment banks do not perform routine banking operations.

Investment banks act as “intermediaries” in large financial transactions like:

• IPOs
• Mergers
• Acquisitions
• Takeovers

They provide expertise and guidance to companies that are looking to raise funds or expand their operations. Some common services offered by these institutions are:

• Issuing bonds
• Acquiring equity capital (underwriting)
• Insuring financial instruments

Internationally, some well-known investment banks are Morgan Stanley, JPMorgan Chase, and Goldman Sachs. India also has several key players like Avendus Capital, Axis Securities, and Edelweiss Financial Services.

Investment banks are different from commercial banks. Both these financial establishments serve different purposes. While commercial banks focus on everyday banking services like loans and deposits, investment banks are more B2B and deal with more complex financial activities like underwriting securities and asset management. For a greater understanding, let’s check out six major differences between them:

1. Services offered

Commercial banks offer standard banking services like:

• Accepting deposits
• Providing loans
• Opening savings accounts and current accounts

Their primary function is to serve individuals and businesses with everyday financial needs.

On the other hand, investment banks offer more specialised services like:

• Underwriting securities
• Managing assets
• Providing financial advice to companies

Their focus is on more complex transactions like mergers and acquisitions and helping a company raise capital. It must be noted that investment banks do not perform routine banking operations.

2. Client base

Commercial banks serve millions of clients. Commonly, this includes individuals, small businesses, and large corporations. Their services are available to the general public.

On the other hand, investment banks serve a much smaller exclusive group of clients, such as a few hundred large corporations and government entities.

3. Key economic role performed

Commercial banks help in the country’s economic growth, as they provide credit to individuals and businesses. This helps in enhancing consumer spending and allows for business expansion.

In comparison, investment banks only operate within financial markets. They facilitate the buying and selling of securities and help companies raise capital. Their work ensures the smooth functioning of financial markets.

4. Revenue sources

Commercial banks primarily earn money through:

• Fees
• Interest on loans
• Charges for banking services

They take money from customers to provide basic banking services. Primarily, they earn by effectively managing the bank spread (difference between interest on loans and deposits).

Conversely, investment banks earn revenue from:

• Commissions
• Underwriting fees
• Profits from trading activities

They charge clients for services like brokerage and advisory. Moreover, they often engage in proprietary trading to make profits from buying and selling stocks and bonds.

5. Primary focus

Most commercial banks focus on:

• Lending money
• Providing mortgages/ home loans
• Accepting deposits
• Offering essential banking services

Due to advancements in technology, they now offer digital banking facilities like mobile banking, internet banking, and providing ATM card facilities.

In comparison, investment banks focus on more B2B financial activities like:

• Managing financial assets
• Underwriting securities
• Offering advisory services for mergers and acquisitions

They deal with larger financial transactions that involve “raising capital” for corporations or governments through stock and bond markets.

If you are looking for safe investment option, then you can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.85% p.a.